The cost of NOT offering credit to customers is lost sales and the gross profit that would have been earned on the lost sales. Because nearly 60% of U.S.-based B2B sales are paid using customer credit, not doing so makes you less competitive and at risk of losing a sale.
The cost of credit, however, can be substantial. It is important to understand and manage the components of the cost of credit to minimize the cost of your credit and collection activities. Here are some suggestions for managing the cost of credit.
Time Value of Money
The credit your company extends to customers creates accounts receivables which must be collected to be converted into cash. The time value of money is the cost to your company of financing accounts receivable until they are converted into cash.
With inflation hitting unprecedented levels, the cost to finance AR with terms such as Net 30 should be evaluated based on your company’s cost and ability to finance. The cost of financing accounts receivable paid late or beyond your allowed terms, which can be expressed as: (cost of money APR%/365) x (amount late) x (days late), should be minimized with credit and collection practices. With inflation rates, unpaid receivables today could lead to significant lost cash in the future.
Cost of Credit and Collection Management
The manual accounting processes today are inefficient, relying heavily on email and spreadsheets to manage an organizations outstanding invoices and cash flow. The average accounting today team is still using the same software stack from 2002. Many finance teams today, have an accounting workflow that consists of emailing PDFs and spreadsheets back and forth to each other to be opened, read, and hand re-entered. This creates disparate, static information that is impossible to keep track of.
Credit and Collections Management (CCM) is a suite of integrated business applications that extend a company’s accounting system to facilitate credit management, billing and invoicing, remittance processing, dispute management, and collections processes. CCM applications are designed to extend the AR module in your existing ERP (accounting) system to effectively manage credit and collections activities with integrated reporting and business metrics. Automated credit and collection solutions can drastically improve efficiency and reduce the cost of credit and collection activities.
How to Continually Monitor Customer Credit Worthiness for Improved Collections
The rapidly changing business environment today has made it more important than ever to continually monitor customer creditworthiness. Where in the past decade, many companies only reviewed customer creditworthiness on a quarterly or annual basis; unless they hit their credit limit, changed payment habits for the worse, or something else major happened. Today, this approach can leave you exposed to more credit risk than your company can afford. Customer creditworthiness needs to be monitored on a continuous basis, so credit limits and terms can be adjusted as necessary to minimize bad debt losses.
Lockstep Receivables has credit management solutions which can help you continually monitor customer creditworthiness including:
Customer Credit Dashboard
The credit dashboard conveniently displays the information your team needs to monitor creditworthiness including:
- Custom credit score – based on factors that are the best indicators of your customers’ creditworthiness.
- Payment habits – whether an account pays late or on time and by how many days.
- Days past due.
- Available credit.
- Credit agency scores, from trusted names including D&B, TransUnion, and Experian.
Alerts can be programmed for important credit factors such as:
- Customer on credit hold.
- Average days late now more than X.
- Change in credit score.
With the rapidly changing business environment making it difficult for credit reporting agencies to provide up-to-date information, organizations need a modern, more effective way to monitor and evaluate customer creditworthiness. With supply chain and production challenges, workforce shortage and the economy impacting businesses, understanding your customers’ ability to pay is paramount.
Credit limits are very important but should be only one of the tools you use to monitor and control credit risk. If credit limits are set too low to avoid bad debt losses, your team will be needlessly tied up reviewing and releasing orders on credit hold. Conversely, if they are set too high, you risk exposing your company to avoidable bad debt losses.
Today, there are several steps an organization can take to continually monitor customer creditworthiness and adjust credit limits and terms when you detect that a customer’s credit profile is deteriorating, without putting undue stress on your accounting and credit teams.
Leveraging Tools and Technology to Monitor Credit Risk
Monitoring credit risk is done more efficiently and effectively with automated credit and collection solutions. Sage AR Automation has a number of solutions which can help you monitor credit risk including:
- Custom Credit Scoring Model: Calculates credit score based on values and weighting assigned to factors you think are the best indicators of your customers’ credit quality.
- Dashboard Reporting: With a glance your team can see a customer’s account status, custom credit score, days past due, available credit, D&B, Experian, TransUnion; and whether the account usually pays on time or late and by how many days.
- Automated Customer Communications: Automated emails or text reminders based on the status of customer invoices.
- Activity Management with Smart Activities: Prioritizes activities for your team based on account information.